The rules around gift funds can be different from lender to lender, and even loan program to loan program.
- Understand the rules around gift funds.
- Provide everything your lender needs from you
and your donor early in the process.
The rules around gift funds can be different from lender to lender, and even loan program to loan program.
Using gift money to help with the purchase of a residence is very common. High home prices have made it difficult for many young borrowers to get a foothold in the housing market without some assistance. If you are going to talk with someone close to you about receiving a gift, there are some things you and your donor need to know.
Many competitive jumbo loan programs, ones where the loan amount is greater than $417,000, require you to have liquid assets equal to 5% of the purchase price seasoned in your account in addition to the gift funds you will receive from your donor, unless you are putting more than 20% down. Seasoned funds are those that have been in your account for 60 days or longer. If you have less than 5% of your own funds seasoned, depositing enough gift money to make up the difference may enable you to get a lower interest rate—so long as you can deposit that money 60 days before you enter into a purchase contract. Remember, this is only important if you are receiving gift funds, you have less than 5% of your own funds seasoned in your account, and your total down payment is 20% or less.
Different lenders have different requirements for gift funds. Some lenders require a letter from the donor stating that the funds are a gift, and that there is no expectation of repayment. A lender may also want to see a copy of the donor’s check or proof of a wire transfer from the donor, and a statement from the account the money came from showing that the donor had the funds available to make sure that you aren’t ‘washing’ a hidden loan you have received from someone else through a donor’s account. The hassle and privacy issues entailed can sometimes be avoided if the donor deposits the funds directly into your escrow account, and the escrow officer can then list the funds and the donor’s name on the closing statement.
Always remember that there can be many exceptions in loan underwriting. A mortgage broker with multiple loan sources including lenders with more flexible underwriting requirements around gift funds may be helpful in making this process smoother.
Note: what follows is a summary of gift tax rules; always talk to your own CPA or financial advisor before gifting money.
If you are going to be receiving gift money from a family member to help with your purchase there are two considerations—the maximum amount that a donor can give without triggering tax consequences, and the tax consequences if that amount is exceeded. The mission of The Insider’s Guide to Mortgages is to be concise and clear; but because we are about to talk about IRS regulations—we’ll just have to do our best.
Any person may make a tax-free gift of $11,000 annually to multiple recipients. For example, two parents can each give $11,000 to one child for a total of $22,000, and they can give $44,000 to a couple. So if Alex and Chris are buying a home together, and Chris’s parents want to help, Chris’s mom can give $11,000 to Alex, and $11,000 to Chris; Chris’s dad can do the same—totaling $44,000. This should be done in four separate checks.
Because the $11,000 limit is for the calendar year, a donor can gift $11,000 in the last week of December, and another $11,000 in the first week of January. Some donors do a combination of a gift and a loan, and each year forgive a portion of the loan up to the maximum amount of gift allowed.
If the $11,000 annual limit to an individual is exceeded, the donor—not the recipient—must file a Gift Tax Return, IRS Form 709. There is no immediate tax owed when the $11,000 limit is exceeded with one exception. Every person is allowed a lifetime tax exemption of $1 million for gifts that exceed the $11,000 per person annual limit. When the $1 million lifetime limit has been met, there is an immediate tax cost for additional gifts. If the donor hasn’t hit the $1 million dollar mark in total gifts, but has exceeded the $11,000 annual limit to an individual, there is no immediate tax owed, but the donor’s estate may have a higher tax bill. Any inheritance tax will be based on the value of the estate less a $1 million exclusion. If the deceased has exceeded the gifting limit, the $1 million dollar exclusion declines by the amount that the gift limit has been exceeded during the lifetime of the deceased. Flat tax, anyone?
